Gold Prices May Bounce Back in the Near Future

July 20, 2013

With gold prices seemingly in their darkest hours, there are mixed feelings from investors when it comes to whether the price will be able to bounce back. Long time gold bulls such as Peter Schiff and Marc Faber view this as a buying opportunity, but Jim Rogers believes that the price could go down even further. Let’s take a look at the main arguments on both sides of the gold debate.

Cost of Production

The main reason that most gold bulls think that now is a great time to buy is because they think that these lower prices will force many gold mines to close. One of the best aspects of gold as money is that supply goes down with the price. As gold prices go down, less people mine gold because it is much harder for it to be a profitable investment. As less people continue to mine gold, the supply of gold actually goes down while the demand stays the same. This leads to an increase in price, and this is largely the reason that many people view gold as a hedge against inflation.

The Counter Argument

The main argument against this claim was recently made by legendary investor Jim Rogers, Rogers has been quoted as saying that gold could go down to as low as $900 without seeing a decrease in world supply. This is because many of the gold mining companies know that a declining gold price usually rebounds due to the fact that many gold miners close down shop during the price drop. The miners will basically want to wait out the lower prices and continue producing gold because they believe that gold prices will once again go up in the future. Jim Rogers has stated that gold prices could continue to decline for one or two more years simply because of the fact that it is rather expensive to close a gold mine and then re-open it in the future. While this is an interesting argument, there are also a few other factors working in gold’s favor.

The Federal Reserve Won’t Slow Down

Another reason that gold could go higher rather soon is that interest rates are not going to be raised by the Federal Reserve any time soon. Although Bernanke has talked about tapering the bond purchasing program over the past few months, the fact of the matter is that there is no way he will be able to pull this off. The price of gold tends to rise when there is inflation and money printing, and that is exactly what is happening right now. Anyone who pays attention to the markets can see that this inflation is leading to the creation of another bubble in the stock market. There is no reason for the DOW to be near all time highs while unemployment is also still so high.

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